Wednesday, 16 July 2014

French macroeconomic policy improvisation

I’m confused about macroeconomic policy under François
Hollande. When he came to power in 2012 he made deficit reduction a priority.
The chance to lead some opposition to the dominant policy of austerity was
lost. However where French policy did seem to differ from some other Eurozone
countries was that tax increases rather than spending cuts would play a
prominent role in deficit reduction. As I noted in this post, the Commission’s austerity enforcer,
Olli Rehn, was not pleased.

However policy in France now seems to have taken a rather
different turn. In January Hollande announced cuts to social charges paid by
business. Many outside comments declared that this was a move ‘to the centre’.
His speech also seemed to imply that he had become a convert
to Say’s Law. But maybe there was a more modern logic to this policy: by
reducing employment costs, perhaps the government was trying to engineer an
‘internal devaluation’.

Yet more recently, Hollande has appeared to pledge tax cuts to middle class
voters. With non-existent growth and a rising budget deficit, the macroeconomic
logic behind this policy escapes me. Many taxpayers will quite reasonably
assume that any tax cuts will turn out to be temporary and will therefore save
a good proportion of them, so the impact on demand will be weak compared to the
cuts in public spending required to pay for them. A deflationary balanced
budget cut in spending is the last thing you want with an estimated negative
output gap of 3% or more. On a more positive note, he also appears to be trying to form alliances to loosen the eurozone fiscal
straightjacket, although what success he will have remains to be seen.

The latest OECD forecast predicts a gradual pickup in growth,
despite a sharp fiscal contraction, although this fiscal contraction is not
enough to stabilise the debt to GDP ratio by 2015. The danger is the by now
familiar one: that fiscal contraction will inhibit growth by more than
forecasters expect, which will generate pressure to undertake additional fiscal
contraction. Is there a clear strategy to avoid this outcome, or is Thomas
Piketty correct when he says: "What saddens me is the ongoing improvisation of
François Hollande.”

“I’m confused about macroeconomic policy under François Hollande.” Are his policies any worse than for example the genius policy adopted in the US during the recession: cutting infrastructure spending? See chart produced by Paul Krugman here:

President Hollande, like most other policy makers in the Euro Area, has not understood that monetary policy is is restrictive. As a result, austerity fails every time in every Euro country. Electorate becomes unhappy, and governments start reversing austerity policies. Then EU Commission protests. Back to square one. That is why budgetary policy is erratic.

maybe, I do say maybe, there's something from Malinvaud's ideas (though french government never quotes him). Firstly less social charges to fight classical unemployment ; secondly, less taxes for low and lower-middle classes to fight keynesian unemployment. And there's a bet: we promise to reduce fiscal deficit but we dither about that (so, the reduction of the deficit is less fast than the one announced) , hoping growth will come soon with political measures above.

Maybe he's treading water until he hears the results of the ECB stress tests. Even if some major French banks skirt by, if the skirting looks fishy enough, it could imperil them somewhat, requiring some further inconvenient and complicated government support. This point of leverage held by the ECB may be constraining Hollande margin of maneuver to come out with some form of bold policy coupling needed domestic regulatory/tax reform (on balance austere in the short term) with necessary Keynesian stimulus. It may also simply be Hollande's deficient temperament and sense of political strategy -- but the delicate financial standoff with the center-right neoliberal ECB may be add reasons to an already hesitant, at-sea man.

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